October 2020

M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations

Mergers and acquisitions involving companies in Accelerating Trend of Payments the payments industry have continued at a fast pace in 2020, with an increasing focus on Companies M&A payments solutions beyond traditional credit Several large capital raising rounds demonstrate cards and accounts. The COVID-19 the strength of payments companies despite, and pandemic has served as an accelerator for digital partially because of, the COVID-19 environment. payments solutions, with a push toward Trends driving this growth include the changing contactless payments and digital solutions for needs of consumers, including the desire for those sheltering at home. The pandemic has also cashless payments, digital onboarding, paperless exposed fintech companies with less durable identity verification and modernized payments revenue models and may increase the sale of infrastructure. In April 2020, payments processor fintech businesses to incumbent bank acquirers. Stripe raised $600 million in a Series G preferred Many large banks are reacting to the pandemic stock capital raise with an enterprise value by prioritizing mobile channels and accelerating estimated at $36 billion. The progress in 2020 of their drive to digital transformation, and in many Marqeta the digital card issuing platform, is cases that decision may lead to acquisitions indicative. In May 2020, it raised $150 million with where the ability to build digital businesses an enterprise value estimated at $4.3 billion. In internally is viewed by incumbents as too slow July 2020, Marqeta partnered with JP Morgan 1 and cumbersome. The payments space in Chase to launch digital-only credit cards and, in particular has been viewed as a bright spot for October 2020, Marqeta and Mastercard fintech, with embedded payment solutions announced a global partnership. Throughout the (where payment innovations are embedded in the summer of 2020 rumors of a Marqeta IPO were end user experience of a non-financial business) reported.2 gaining traction. Technology companies, such as Facebook, Apple, Amazon and Google, are also Perhaps the best indication of the importance of investing in payments solutions. The growing digital payment solutions can be seen in the three importance of online payments processors, such large deals announced in 2020 by three of the as PayPal and Stripe, and embedded payments largest networks, American Express, companies, such as Shopify, Instacart and Klarna, Visa and Mastercard. exemplify these trends. Visa/Plaid: In January 2020, Visa announced that working capital products to its small business it would acquire data aggregator Plaid, with a customers in the United States.6 Kabbage’s closing still pending as of the date of this article. lending portal unifies online bill payment, credit The consideration for the transaction totals $5.3 lines and cash flow management tools as well as billion, consisting of approximately $4.9 billion of a business checking account. American Express cash and $400 million of retention equity and did not purchase Kabbage’s pre-existing portfolio deferred equity consideration. This acquisition will of marketplace loans. American Express will allow Visa to continue expanding from its core benefit from the well-regarded fintech lending credit and debit network business into an technology held by Kabbage as well as its emerging fintech ecosystem. Prior to the technology talent in a market where human acquisition, Plaid successfully worked to allow resources are regarded as scarce. Kabbage’s consumers to connect their bank accounts with lending platform gathers data about small numerous successful fintech businesses (e.g., the business customers, including bank account data, popular “Venmo” application). According to Visa, payment processing data, shipping data, credit the acquisition of Plaid presents an opportunity card transaction data and accounting information. for Visa to use its reputation and recognition in the marketplace to grow Plaid’s payment Special Consideration for Payments capabilities and further develop Visa’s relationships with fintech companies in the Companies M&A Transactions future.3 The Plaid transaction was regarded as Payments company M&A transactions present a one of the most successful fintech exits to date.4 number of issues unique to this fintech asset Mastercard/Finicity: In June 2020, Mastercard class. Special attention should be paid to the agreed to buy a financial data aggregator, following considerations: (1) the complex and Finicity, for $825 million plus up to $160 million in often competing regulatory framework for earn-out payments if certain performance targets payments companies, including state and federal are met. According to Mastercard, Finicity will banking regulations as well as state bolster Mastercard’s open banking services in transmission laws; (2) valuation issues and the North America and provide one-stop shopping desirability of earn-out structures; (3) conditions for their customers’ data, payment and open to closing and consents needed in the payments banking needs.5 Finicity’s online platform will give space; and (4) technology and key contract customers the ability to allow their banking diligence issues. partners to make scheduled payments on their behalf and provide advice on money Regulatory Overlay for Transactions management. As with the Visa/Plaid deal, this Involving Payments Company deal highlights the importance of payments infrastructure for large financial institutions Payments companies are subject to a complex embracing fintech solutions. regulatory framework, at both the state and federal level. These regulations are in addition to American Express/Kabbage: In August 2020, a financial institution’s compliance obligations American Express announced that it had agreed under banking laws related to M&A transactions. to acquire substantially all of the assets of the When considering a payments company fintech lender, Kabbage. According to American transaction, the buyer should diligence the seller’s Express, Kabbage’s technology, products and compliance with its regulatory obligations sooner people will allow American Express to offer a rather than later in the transaction lifecycle. broader set of cash flow management tools and

2 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations STATE MONEY TRANSMITTER LICENSURE pursue this option, then the buyer should REQUIREMENTS consider requiring the payments company to At the state level, payments companies (and finalize the third-party partnership as a condition many other types of fintech companies that to closing. provide payments functionality as an embedded payment solution) may be subject to money ONGOING COMPLIANCE OBLIGATIONS FOR transmission laws in 49 states and the District of STATE LICENSED MONEY TRANSMITTERS Columbia.7 Generally speaking, state money If the payments company is a licensed money transmission laws regulate receiving money for transmitter, the company will be subject to transmission or transmitting the same; however, ongoing compliance obligations under state the exact scope of regulated activity varies money transmission laws. The ongoing among states.8 Consequently, a payments compliance obligations may vary by state; company and its potential buyer should evaluate however, most states impose compliance the money transmission laws in 50 jurisdictions (in obligations related to the transmitter’s net worth addition to federal laws) to determine whether and national outstandings. First, a licensed money the payments company is operating in transmitter must hold a tangible net worth in an compliance with state money transmission laws.9 amount specified either by statute or the state regulator. Second, nearly every state money If a payments company does not hold transmission law requires a licensee to at all times appropriate money transmitter licenses, the buyer hold “permissible investments”10 at least equal to should consider structuring the transaction so the licensee’s “national outstandings.” A licensee’s that the company’s licensure obligations are outstandings are all money received for satisfied prior to closing. As an initial step, the transmission by the licensee or its agents that has parties should evaluate whether the payments not yet been paid to the recipient or refunded to company’s business model is viable once a the sender.11 money transmitter license is obtained and whether the company must amend its practices to Only certain types of assets qualify as permissible comply with the state’s requirements to obtain investments.12 They include cash, US bank and maintain a money transmitter license. deposits and certain types of highly-rated Assuming the buyer determines the business securities.13 A licensee must hold permissible model will continue to be viable when operating investments free from any lien, encumbrance or as a licensed money transmitter, then the buyer security interest.14 As a result, any security interest should consider requiring the payments company that a licensee grants that potentially could cover to obtain all necessary state licenses as a assets that the licensee counts as permissible condition to closing. However, the buyer should investments (such as a blanket security interest in bear in mind that the licensing process can be all the licensee’s assets) must carve out assets lengthy and costly. Another popular alternative is held for permissible investments. Regulators will that the payments company could partner with a sometimes raise concerns if they conclude that licensed money transmitter or a financial the carve out is ambiguous about the scope of institution to handle the actual funds assets excluded from the security interest. transmission. While this approach may be more Most, if not all, states require that the state expedient, bringing in a third party to perform regulator be notified of a change in “control” of a this critical function can change the economics of licensed money transmitter.15 Although the the potential transaction. The buyer should definition of “control” varies by state, most states evaluate whether the payments company will be employ a definition similar to that established in as profitable if it is sharing revenues with a third- the New York Banking Law, i.e., “the , party service provider. If a buyer decides to

3 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations directly or indirectly, of the power to direct or Consumer Financial Protection Bureau (the cause the direction of the management and “CFPB”) retains jurisdiction over some payments policies of a licensee, whether through the companies. Most notably, the CFPB’s Prepaid Rule ownership of voting stock of such licensee, the can present significant and complex regulatory ownership of voting stock of any person which compliance burdens for a payments company.24 possesses such power or otherwise.”16 Often a Among other things, the Prepaid Rule requires a threshold of 15% to 25% of ownership is used to regulated entity to provide a consumer with two determine whether a person has “control” of a disclosures prior to acquiring a “prepaid money transmitter.17 Some states, such as account.”25 “Prepaid account” captures much California and New York, require prior notice and more than a traditional prepaid card and can approval of a change in control.18 Other states, extend to digital wallets.26 The Prepaid Rule’s such as Florida, require the submission of a new coverage of digital wallets is currently being license application by the proposed person to challenged in court.27 Specifically, a major digital obtain control of the licensed money wallet provider has challenged the CFPB’s transmitter.19 Mergers can constitute a change of application of the Prepaid Rule to digital wallets control depending on the definition specified in under the Administrative Procedure Act and the the state’s money transmitter laws.20 Thus, the First Amendment and recently filed a motion for change of control provisions in each state in summary judgment in the US District Court for which the payments company is licensed should the District of Columbia.28 The CFPB recently be evaluated. responded to the digital wallet provider’s challenge.29 The court’s opinion is pending. Regardless of when the change in control notice must be submitted, the buyer will likely be A payments company may also be subject to anti- required to make extensive disclosures regarding money laundering rules issued by the Financial not only the entity acquiring the payments Crimes Enforcement Network (“FinCEN”) if the company, but also individuals whose ownership company constitutes a “money services interest in the buyer would result in a business.”30 FinCEN has established seven “controlling” interest of the payments company.21 different types of money services businesses, one A change in control may require the same of which is a “money transmitter.”31 Like state amount of disclosure as that required for an initial money transmission laws, FinCEN has adopted its application for a money transmitter license.22 The own definition of “money transmitter,” which may personal disclosure requirements are quite differ from a specific state’s definition.32 If a invasive in some states and may require items payments company constitutes a money such as: (i) criminal background checks that may transmitter or any other type of money services only be scheduled and/or completed at certain business, as defined by FinCEN, then the designated locations; (ii) state specific company must, among other things, “develop, background checks that may only be completed implement, and maintain an effective anti-money using state specific fingerprint cards; (iii) laundering program.”33 residential histories; (iv) employment histories; An additional federal compliance consideration and (v) personal financial histories.23 for bank and bank affiliate buyers is compliance FEDERAL PAYMENTS COMPANY with the Bank Holding Company Act (the COMPLIANCE OBLIGATIONS “BHCA”).34 If the buyer’s investment is significant In addition to state regulatory compliance enough, then the payments company may be obligations, a payments company may also be subject to the BHCA restrictions on permissible subject to compliance obligations under federal activities after the acquisition. Such restrictions financial services laws. For example, the should be taken into account not only when

4 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations evaluating the payments company’s current response to the following questions: “What new activities but also future activities that the payments technologies and processes should the company is contemplating. OCC be aware of and what are the potential implications of these technologies and processes REGULATION OF EMBEDDED for the banking industry? How are new payments FUNCTIONALITIES technologies and processes facilitated or In addition to the above general payments hindered by existing regulatory frameworks?”38 regulatory considerations, functionalities The broad scope of the OCC’s inquiry presented embedded in a payments company’s platform can both payments companies and financial raise other specific regulatory considerations. This institutions with the opportunity to submit is particularly true for the increasing number of information regarding recent developments in the payments companies that rely on open banking industry and identify regulatory burdens that may technology to provide services to their customers. hinder further innovation. The OCC has advised that even if a payments company and a financial institution have not At the state level, the Conference of State Bank entered into a formal information sharing Supervisors recently announced the launch of a agreement, the financial institution is still coordinated multi-state money transmitter expected to comply with certain regulatory examination process through which a licensed expectations.35 While a payments company may money transmitter can undergo one examination not be directly subject to these regulatory to satisfy its examination obligations in more than expectations, potential partners or buyers may 40 states. Examinations can be a costly and time- expect the company to utilize technology that consuming process. Undergoing one fully maximizes its open banking capabilities consolidated examination to satisfy a statutory within those regulatory expectations. examination obligation in a majority of states may result in reduced compliance costs for a licensed Regulatory Changes on the Horizon money transmitter. The above is in addition to state and federal State and federal regulators are pursuing regulatory sandboxes as well as the establishment regulatory and operational changes to reflect the of offices of innovation that evaluate evolving payments landscape. At the federal level, developments in the financial services industry Acting Comptroller of the Brian Brooks more generally. recently announced that the Office of the Comptroller of the Currency (the “OCC”) will accept applications from payments companies to Valuation Issues for Payments obtain a national bank charter, referred to Company M&A: Use of Earn-Outs informally as a “payments charter.”36 A payments In the post-COVID-19 world, potential obstacles charter could consolidate a payments company’s to using straight cash consideration in payments 50-jurisdiction licensure and compliance company M&A deals may become more obligations under the jurisdiction of one federal pronounced. Valuation of a potential target may regulator. This change could potentially reduce a be more difficult, leading to a greater chance that payments company’s compliance burden and there is a significant difference between buyers’ associated costs. and sellers’ respective valuations of a prospective The payments charter is in addition to the OCC’s target. Valuation issues are always more acute for recent advanced notice of proposed rulemaking an emerging fintech company that has not yet published July 7, 2020 (the “ANPR”).37 Among proven its ability to generate net income. other things, the ANPR requested comments in Potential issues for the buyer from the regulatory

5 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations side, such as the need for money transmitter used, the better, as vaguely defined metrics and licenses and the potential need to build a more targets may lead to disputes or litigation. robust compliance management system, may also Another potential area of contention is the timing pose valuation challenges. of payments and length of the earn-out period. Earn-outs are a popular mechanism to bridge the Sellers will generally prefer shorter periods, differences between the perceived value of a although the length of an earn-out period will target from the buyer’s and the seller’s also depend on the type and status of the perspective. Earn-outs require the seller to accept payments business and the goals agreed upon by a lower initial purchase price based on the theory the parties. If there are disagreements about the that the seller will share in the upside of the length of the earn-out period, interim targets may target business prospering in the hands of the help bridge the gap by allowing partial payment buyer. This mechanism is generally easy to of the earn-out at set intervals so long as interim understand at a high level. It is also considered targets are met. intrinsically fair, because it gives the seller the A frequent concern with respect to earn-outs is opportunity to “prove” the promising projections the extent of the buyer’s obligations to run the it has provided to the buyer. The buyer is also acquired business in a way that makes the earn- benefitted by the acquired business meeting firm out achievable. Sellers will want to restrict the milestones. ability of the buyer to take actions that make the Although earn-outs are easy to understand achievement of the earn-out targets more conceptually, in practice there are a number of difficult and bind the buyer to agree to make concerns to keep in mind when considering this investments in the acquired business to help it form of consideration because disputes over thrive. Buyers do not want an express obligation whether earn-out targets have been met are to take specific actions with regard to the common. A key element of any earn-out, which is acquired business, as they will want maximum often the subject of extensive discussions flexibility to operate the acquired business in a between the parties, is the target metric(s) that way that is best for the entire company, not just must be met. Targets are typically financial the acquired business. In fact, buyers usually push targets, such as revenue or EBITDA, but they can to include disclaimers of any obligation to also be based on other metrics or milestones operate the acquire business in any particular tailored to the particular industry, such as the manner. In order to make calculations of whether number of retained or new clients for a payments the earn-out target has been met more company serving small businesses or consumers. straightforward, sellers may request (and some The choice of metric can be contentious, as both sellers may insist) that the acquired business be the buyer and seller will want to limit the ability of kept separate from the rest of the company, with the other party to manipulate any data used to separate bookkeeping for the acquired business. calculate whether the target has been met. For Aligning the economic interest of the buyer and example, the seller may attempt to push for a the seller in achieving an earn-out will be key and straight gross revenue target to prevent the buyer often times can provide more practical protection from moving costs to the target business in an than detailed operating covenants. inequitable manner, whereas the buyer often wishes to use a metric that includes costs in order Conditions to Closing to provide a more holistic representation of the success of the target business. In general, the Beyond the conditions to closing found in most more objective and straightforward the metric M&A deals (e.g., representations true and correct, covenants performed, no illegality, any antitrust

6 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations or regulatory approvals received and the like), are identified, retained and motivated, whether buyers in payments M&A transactions may through employment agreements, incentive require some conditions tailored to the payments plans, equity grants or longer term strategic business. First, as discussed above, most state opportunities and integration. regulators of money transmitter licenses require notice or approval of a “change in control” or Technology Diligence Issues submission of a new license application by the buyer. Receipt of these approvals would typically In payments company M&A transactions, be a condition to closing for both the buyer and technology is often a key asset and value driver— seller. On the other hand, if the buyer is a national in some cases, acquiring technology is the bank not otherwise required to maintain a state primary reason for the deal in the first place. money transmitter license, the bank may opt to Failure to conduct adequate technology due surrender the payments company’s license.39 diligence can leave a buyer prone to However, surrender of a license does not reduce overvaluation of a target because of an or eliminate the license holder’s civil or criminal insufficient understanding of the strengths, liability arising from any acts or omissions before weaknesses and risks of the technology the the surrender of the license.40 company is reliant upon. In conducting technology due diligence of a payments Buyers may also want to consider adding closing company, buyers need to confirm that the conditions that specifically address prior to technology and infrastructure of the business are closing regulatory compliance issues found explainable, resilient, secure and scalable. It is during the buyer’s due diligence. For example, the critical for integration planning that the target’s buyer may want to revamp customer agreements technology be well-documented, including its or websites that do not comply with law rather architecture and data flows. Buyers will want to than closing over these issues and raising know about past problems, whether these potential reputational risk and business problems caused any material disruption, and interruption issues for the buyer. Note that the how they were resolved. Buyers should consider CFPB has argued in the pre-Kraninger era that including representations and warranties providing investment capital in a non-M&A regarding identification of material IT context that allows a company to engage in components, whether they are in good working business activities may constitute “substantial order, whether they are sufficient to conduct the assistance” for the target’s violations of law. As business and whether there have been any bugs, discussed below, closing conditions tied to failures or breakdowns that have caused technology issues may also be desired. For interruption or disruption. example, where a software audit identifies open source software ownership issues, removal of any The use of open source code in the development source code governed by the problematic open of business technologies, while prevalent, can source licenses may be warranted. Technology sometimes pose risks to the buyer. Using open audits and transition plans may be appropriate source code in development offers a number of covenants that the buyer should ensure are advantages, including lowering up-front costs satisfied prior to at closing. Consents and waivers and allowing companies to leverage the under key contracts may be required, especially if knowledge of a community of developers—not the target gave up exclusivity, non-competition, just their own—which means companies don’t most favored nation pricing or rights of first have to spend time reinventing wheels and can refusal provisions early in its development. Finally, rely on the community to surface bugs and edge the buyer may want to ensure that top innovators use cases much more quickly than they could have on their own. As a result, all modern

7 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations companies use open source code in their of any IP developed pursuant to government, development, and payments companies are no military or university grants. Where the business different. There are, however, different licensing technology is dependent on licensed third-party regimes under which different open source code IP, the buyer should review the terms of these is licensed to the public. Some licensing regimes licenses closely, including for assignment and can materially impact the proprietary nature of consent rights of the licensor and other the owned software of the target’s business. potential issues. Where software is an important element of the Cybersecurity and privacy diligence is also a key deal, engaging a software auditing service (e.g., area of diligence for buyers of payments Black Duck) early in the process will allow the companies because prior data security and buyer to better understand the scope of the open privacy breaches can result in lingering liability for source use in the target’s software and the the buyer and can significantly decrease the licensing regimes (and therefore obligations and valuation of a target. Buyers have been subject to restrictions) under which the code has been class action lawsuits, fines by regulatory licensed in order to identify potential risk areas at authorities and other losses arising from security the onset. Scans are becoming more common incidents that occurred prior to the acquisition. and can be performed relatively quickly. The buyer can also include specific open-source As a diligence matter, the buyer should request representations and warranties as well as and review copies of policies, contracts and other covenants and closing conditions requiring the documents of the business relating to removal of any source code governed by the cybersecurity and data privacy, including any problematic open source licenses. previous audit results. The buyer should also review the procedures the target has put in place In addition to the technology diligence to protect its employee, customer and business mentioned above, the buyer should also conduct partners’ data and information as well as its intellectual property due diligence to confirm that networks and systems. The buyer should be the value it places on the business is supported especially focused on past data breaches or by the degree to which the target owns (or has intrusions into the target’s network, including the right to use) all of the IP that is critical to its how such breaches or intrusions were discovered current and anticipated business. If there are gaps or detected, how they were investigated, and in ownership or if the target is dependent on a what remedial actions were taken. third party to defend, enforce or otherwise use or exploit its technology, then this could significantly In addition, the buyer should consider adding affect the valuation and the determination of a data privacy and cybersecurity representations go/no-go decision. Buyers should confirm that and warranties that include representations confidentiality and invention assignment (1) that the business has materially followed agreements are in place with all employees and written information security policies (WISPs), contractors (especially developers). Such (2) regarding known or suspected data breaches agreements should be signed at the outset of the or other cyber incidents and (3) that the business employment (or other contractual relationship) has complied with data privacy and cybersecurity with the target to ensure there are no gaps in laws, obtained consents and that transfer is ownership and buyers should not neglect former permissible. employees or contractors in its diligence. If any IP was developed jointly with a third party, there Key Contract Diligence Issues may be restrictions on the created IP that must be In considering the acquisition of a fintech or considered by the buyer. Buyers should be careful payments company, the buyer should be aware

8 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations that smaller organizations (particularly startups) that limit the buyer’s ability to buy and operate tend to have more hidden contract landmines the new business, such as exclusivity and non- than established players. The landmines can compete clauses? The buyer will need to develop include overbroad exclusivity and most favored processes to track these restrictions. With a fast nation provisions and rights of offer and refusal changing world, a strategy that seems giving a contract counterparty rights to buy the unfathomable today could very well be an business. Start-up companies may lack attractive opportunity tomorrow. To the extent sophistication in contracting or may not be as possible, buyers should avoid agreeing to these concerned about agreeing to restrictive contract restrictions in the first place as a matter of provisions at the early stages of their lifecycle. corporate policy and, at a minimum, track them They may also lack negotiating leverage to say carefully. “no” to demands of more established counterparties and may be less concerned with Conclusion binding “affiliates” than larger, more diverse organizations. On the other hand, large M&A in the payments industry remained quite organizations are not immune from contract active during the COVID-19 shutdown period and landmines especially where the interests of a will likely continue into 2021 and beyond. Buyers business unit may diverge from those of the and sellers of payments companies should be organization as a whole. In either case, the buyer aware of the many unique regulatory, technology cannot simply rely on the seller to identify and contractual issues that may arise in the M&A contract restrictions as part of the representation context. Despite the complexity, payments and warranty/disclosure schedule process. companies will continue to thrive, develop new use cases, and attract acquisition and investment Due diligence request lists need to focus not only activity for the foreseeable future. on contracts that are driving the success of the business, but also those that could be overly burdensome to comply with. Sellers are cost For more information about the topics raised in conscious and typically perform very limited sell- this Legal Update, please contact any of the side due diligence. The remedies for breaches of following lawyers. representations and warranties may be inadequate to cover a missed contract provision Elizabeth A. Raymond where the business still needs to comply with +1 312 701 7322 these restrictions after closing. Buyers should also [email protected] diligence out-of-scope contracts that relate to the Julia L. Dempewolf business. Even though the buyer may not be +1 202 263 3150 taking assignment of a contract, the out-of-scope [email protected] contract may impact the transaction. For example, David L. Beam rights of first offer and first refusal that give a +1 202 263 3375 third party a right to acquire the business can be [email protected] particularly troublesome. The buyer should include specific due diligence requests aimed at Rohith P. George fleshing out this issue and ensure that +1 650 331 2014 representations and warranties are not too [email protected] narrowly tailored. Buyers also need to consider their own agreements. Are there any existing agreements

9 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations Endnotes

1 See “A burning platform: Revamping bank operating models for currency, monetary value, or payment instruments for the payments,” 2020 McKinsey Global Payments Report (Oct. 2020), purpose of transmitting the same by any means, including https://www.mckinsey.com/~/media/mckinsey/industries/finan transmission by wire, facsimile, electronic transfer, courier, the cial%20services/our%20insights/accelerating%20winds%20of% Internet, or through bill payment services or other businesses 20change%20in%20global%20payments/chapter-4-revamping- that facilitate such transfer within this country, or to or from bank-operating-models-for-payments.pdf. this country.”). 2 See “Modern Card Issuing Leader Marqeta Valued at $4.3B in 9 While most states exempt certain financial institutions from the Latest Round,” Businesswire (May 28, 2020), state’s money transmitter license requirements, the exemption https://www.businesswire.com/news/home/20200528005169/e may not apply wholesale to all banks. See, e.g., Cal. Fin. Code § n/Modern-Card-Issuing-Leader-Marqeta-Valued-4.3B; 2010(d) (exempting a “commercial bank or industrial bank, the “Exclusive: Goldman Sachs-backed payments startup Marqeta deposits of which are insured by the Federal Deposit Insurance prepares for IPO,” Reuters Industry, Materials & Utilities (July 9, Corporation or its successor, or any foreign (other nation) bank 2020), https://www.reuters.com/article/us-marqeta-ipo- that is licensed under Chapter 20 (commencing with Section exclusive/exclusive-goldman-sachs-backed-payments-startup- 1750) or that is authorized under federal law to maintain a marqeta-prepares-for-ipo-idUSKBN24A37L; “J.P. Morgan federal agency or federal branch office in this state.”). Teams with Marqeta on Virtual Cards for Commercial Clients,” 10 California uses the term “eligible securities,” but the concept is Payment Methods (July 28, 2020), identical. The term eligible securities is not limited to securities, https://www.pymnts.com/news/payment-methods/2020/j-p- and includes cash and bank deposits. morgan-teams-with-marqeta-on-virtual-cards-for-commercial- 11 The definition in the California Money Transmission Act is clients/; “Mastercard Invests in Another Fintech, Marqeta,” typical: “‘Outstanding,’ with respect to receiving money for Barron’s Financials (October 8, 2020), transmission means all money or monetary value received in https://www.barrons.com/articles/mastercard-invests-in- the United States for transmission by the licensee or its agents another-fintech-marqeta-51602174374. but not yet paid to the beneficiaries or refunded to the person 3 See “Visa to Acquire Plaid,” Visa Press Release (January 13, from whom the money or monetary value was received. All 2020), https://usa.visa.com/about-visa/newsroom/press- outstanding money transmission of a licensee is and shall releases.releaseId.16856.html. remain a liability of the licensee until it is no longer 4 See “Visa Acquires Plaid: A Review Of The Financial Data & outstanding.” Cal. Fin. Code § 2003(r). Infrastructure Market,” CB Insights Research Briefs, (January 15, 12 See, e.g., 205 I.L.C.S. 657/50(a) (“Permissible investments 2020), https://app.cbinsights.com/research/visa-plaid- include, but are not limited to, all of the following acquisition-analysis/. unencumbered items: (1) Cash on hand or on deposit in the 5 See “Mastercard to Acquire Finicity to Advance Open Banking name of the licensee. (2) Certificates of deposit of a bank, Strategy,” Mastercard Investor News Details, June 23, 2020, savings and loan association, or credit union. (3) Bills of https://investor.mastercard.com/investor-news/investor-news- exchange or time drafts that are drawn on and accepted by a details/2020/Mastercard-to-Acquire-Finicity-to-Advance-Open- bank, otherwise known as ’s acceptances, and that are Banking-Strategy/default.aspx. eligible for purchase by member banks of the Federal Reserve 6 See “American Express to Acquire Kabbage,” American Express System. (4) Commercial paper bearing a rating of one of the 3 Press Release (August 17, 2020), highest grades as defined by a nationally recognized https://about.americanexpress.com/all-news/news- organization that rates these securities. (5) Securities, details/2020/American-Express-to-Acquire- obligations, or other instruments, whose payment is Kabbage/default.aspx. guaranteed by the general taxing authority of the issuer, of the United States or any state or of any other governmental entity 7 We use the term “state” to refer to states and the District of or political subdivision or instrumentality of a governmental Columbia collectively. Montana is the only state that does not entity that bear a rating of one of the 3 highest grades by currently have a money transmission statute. Moody’s Investors Service, Inc. or Standard and Poor’s 8 See, e.g., Cal. Fin. Code § 2003(q) (defining “money Corporation. (6) Bonds or other obligations of a corporation transmission” as “any of the following: (1) Selling or issuing organized in a state of the United States, the District of payment instruments. (2) Selling or issuing stored value. (3) Columbia, the Commonwealth of Puerto Rico, or the several Receiving money for transmission.”); see also Fla. Stat. § territories organized by Congress that bear a rating of one of 560.103(23) (defining “money transmitter” as a “corporation, the 3 highest grades by Moody’s Investors Service, Inc. or limited liability company, limited liability partnership, or foreign Standard and Poor’s Corporation. (7) Investment securities that entity qualified to do business in this state which receives are obligations of the United States or its agencies or

10 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations instrumentalities or obligations that are guaranteed fully as to with the prior approval of the superintendent for any action to principal and interest by the United States. (8) Receivables that be taken which results in a change of control of the business of are due a licensee from its authorized sellers pursuant to a licensee.”) contract … that are not past due or doubtful of collection.”). 19 See, e.g., Fl. Stat. § 560.126(3)(a) (“If any person, directly or 13 See id. indirectly or acting by or through one or more persons, proposes to purchase or acquire a controlling interest in a 14 See id. licensee, such person or group must submit an application for 15 See, e.g., Cal. Fin. Code § 2035(a) (“No person shall, directly or licensure as a money services business or deferred presentment indirectly, acquire control of a licensee unless the commissioner provider before such purchase or acquisition at such time and has first approved, in writing, the acquisition of control.”); see in such form as prescribed by rule.”). also N.Y. Banking Law § 652-a(1) (“It shall be unlawful except 20 See, e.g., Cal. Code Regs. tit. 10 § 80.8304(a) (“[F]or a person to with the prior approval of the superintendent for any action to ‘take action to acquire control’ of a licensee means for the be taken which results in a change of control of the business of person to: … Make an agreement (including an agreement to a licensee.”). merge a parent of the licensee or to purchase securities of the 16 See, e.g., N.Y. Banking Law § 652-a(4) (“As used in this section licensee or of a parent of the licensee), if the person would by the term ‘control’ means the possession, directly or indirectly, consummation thereof acquire control of the licensee[.]”). of the power to direct or cause the direction of the 21 See, e.g., Tex. Fin. Code Ann. § 151.002(6) (“‘Control’ means management and policies of a licensee, whether through the ownership of, or the power to directly or indirectly vote, 25 ownership of voting stock of such licensee, the ownership of percent or more of the outstanding voting interests of a license voting stock of any person which possesses such power or holder or applicant, and includes an individual whose otherwise. Control shall be presumed to exist if any person ownership is through one or more legal entities.”). directly or indirectly, owns, controls, or holds with power to vote twenty-five per centum or more of the voting stock of any 22 See, e.g., Tex. Fin. Code Ann. § 151.605(d); see also Wash. Rev. licensee or of any person which owns, controls or holds with Code § 19.230.160. power to vote twenty-five per centum or more of the voting 23 See, e.g., California Department of Financial Protection and stock of such licensee, but no person shall be deemed to Innovation, “Application for Approval to Acquire Control of control a licensee solely by reason of his being an officer or Money Transmitter,” https://dfpi.ca.gov/wp- director of such licensee or person. The superintendent may in content/uploads/sites/337/forms/money-transmitter/DBO- his discretion, upon the application of a licensee or any person 2118.pdf. who, directly or indirectly, owns, controls or holds with power 24 See 12 C.F.R. § 1005.18-.19. to vote or seeks to own, control or hold with power to vote any 25 See 12 C.F.R. § 1005.18(b). voting stock of such licensee, determine whether or not the ownership, control or holding of such voting stock constitutes 26 See 12 C.F.R. § 1005.2(b)(3)(i). or would constitute control of such licensee for purposes of 27 PayPal, Inc. v. Consumer Fin. Prot. Bureau, No. 19-cv-3700 this section.”). (D.D.C. filed Dec. 11, 2019). 17 See, e.g., Fl. Stat. § 560.127 (“A person has a controlling interest 28 Memorandum in Support of Plaintiff’s Motion for Summary in a money services business if the person: (1) Possesses the Judgment, Dkt. 19-1 at 9, PayPal, Inc. v. Consumer Fin. Prot. power, directly or indirectly, to direct the management or Bureau, No. 19-cv-3700 (D.D.C. May 6, 2020). policies of the money services business, whether through 29 Combined Memorandum in Opposition to Plaintiff’s Motion for ownership, by contract, or otherwise; (2) Directly or indirectly Summary Judgment and in Support of Defendants’ Cross- may vote 25 percent or more of a class of a voting security or Motion for Summary Judgment, Dkt. 21, PayPal, Inc. v. sell or direct the sale of 25 percent or more of a class of voting Consumer Fin. Prot. Bureau, No. 19-cv-3700 (D.D.C. July 7, securities; or (3) In the case of a partnership, may receive upon 2020). dissolution or has contributed 25 percent or more of the 30 See 31 C.F.R. Part 1022. capital.”; see also Ariz. Rev. Stat. § 6-1201(3) (“‘Control’ means ownership of fifteen per cent or more of a licensee or 31 See 31 C.F.R. § 1010.100(ff). controlling person, or the power to vote fifteen per cent or 32 See id. more of the outstanding voting securities of a licensee or 33 31 C.F.R. § 1022.210(a). A bank or bank holding company controlling person.”). acquiring a payments company should consider its existing 18 See, e.g., Cal. Fin. Code § 2035(a) (“No person shall, directly or anti-money laundering (“AML”) and Office of Foreign Assets indirectly, acquire control of a licensee unless the commissioner Control (“OFAC”) compliance obligations, which are likely has first approved, in writing, the acquisition of control.”); see significantly more rigorous than the corresponding obligations also N.Y. Banking Law § 652-a(1) (“It shall be unlawful except of the seller. The bank or bank holding company should

11 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations consider whether the payments company’s business model will Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world’s leading companies and financial institutions on their most complex be viable if operated under the more rigorous standards. One deals and disputes. With extensive reach across four continents, we are the consideration may be that the seller’s less stringent AML/OFAC only integrated law firm in the world with approximately 200 lawyers in each of compliance obligations enable a payments company to operate the world’s three largest financial centers—New York, London and Hong Kong—the backbone of the global economy. We have deep experience in faster and more efficiently because it follows AML/OFAC high-stakes litigation and complex transactions across industry sectors, compliance procedures that are considerably more streamlined including our signature strength, the global financial services industry. Our than what would be required post-acquisition. diverse teams of lawyers are recognized by our clients as strategic partners with deep commercial instincts and a commitment to creatively anticipating 34 See 12 U.S.C. § 1841 et seq. See “US Federal Reserve Board their needs and delivering excellence in everything we do. Our “one-firm” Approves Final Rule Significantly Revising Control Rule,” Legal culture—seamless and integrated across all practices and regions—ensures Update (February 7, 2020), https://www.mayerbrown.com/- that our clients receive the best of our knowledge and experience. /media/files/perspectives- Please visit mayerbrown.com for comprehensive contact information for all Mayer Brown offices. events/publications/2020/02/usfederalreserveboardapprovesfin Any tax advice expressed above by Mayer Brown LLP was not intended or written to be alrule.pdf. used, and cannot be used, by any taxpayer to avoid U.S. federal tax penalties. If such 35 advice was written or used to support the promotion or marketing of the matter addressed See “Third-Party Relationships: Frequently Asked Questions to above, then each offeree should seek advice from an independent tax advisor. Supplement OCC Bulletin 2013-29,” OCC Bulletin 2020-10, Mar. This Mayer Brown publication provides information and comments on legal issues and 5, 2020, at Question 4. developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide 36 Victoria Guida, “Top regulator pushes ahead with plan to legal advice. Readers should seek legal advice before taking any action with respect to the matters discussed herein. reshape banking, sparking clash with states,” POLITICO, Aug. 31, Mayer Brown is a global services provider comprising associated legal practices that are 2020. separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer 37 National Bank and Federal Savings Association Digital Advogados (a Brazilian law partnership) (collectively the “Mayer Brown Practices”) and Activities, 85 Fed. Reg. 40827 (July 7, 2020). non-legal service providers, which provide consultancy services (the “Mayer Brown Consultancies”). The Mayer Brown Practices and Mayer Brown Consultancies are 38 Id. at 40830. established in various jurisdictions and may be a legal person or a partnership. Details of the individual Mayer Brown Practices and Mayer Brown Consultancies can be found 39 See, e.g., Tex. Fin. Code Ann. § 151.208; see also Wash. Rev. in the Legal Notices section of our website. Code § 19.230.070(5). “Mayer Brown” and the Mayer Brown logo are the trademarks of Mayer Brown. © 2020 Mayer Brown. All rights reserved. 40 See id.

12 Mayer Brown | M&A in the Payments Sector: Key Legal, Regulatory and Contractual Considerations